Class 3: The Five Forces

MG106 Strategic Management

José Ignacio González Rojas

London School of Economics and Political Science

June 26, 2025

The Paradox

How do companies selling colored sugar water 💧 earn 35% profit margins for over 100 years? 🤔

Today’s Investigation

Using Porter’s Five Forces Framework

1️⃣ Why are concentrate producers so profitable?

2️⃣ How do they control without owning?

3️⃣ Did competition destroy or create value?

4️⃣ What’s their future in a health-conscious world?

15 minutes with your group - Apply the framework!

Discussion Time ⏰

What forces explain the profitability?

Question 1: The Profit Mystery 💰

The Economics Revealed

Concentrate Producer Bottler
Gross Margin 83% 📈 35% 📉
Pretax Profit 35% 💎 9% 😔
Capital Required $50M $75M+ per plant
Plants Needed 1 nationally 80-85 nationally

Same industry, vastly different economics

Force 1: Barriers to Entry 🚧

Traditional Barriers

  • Brand equity: 100+ years of emotional connection
  • Shelf space: Every slot occupied
  • Ad efficiency: $10M per share point (Coke) vs $22M (7-Up) 📺

Modern Challenges

  • Global distribution: $6B to replicate 🌍
  • Exclusive territories: Legal protection
  • Consumer identity: “Pepsi Generation”

Zero successful cola entrants in 50+ years

Forces 2 & 3: Suppliers and Buyers 📦💪

Supplier Power: The Secret Recipe

What goes in:

  • Caramel coloring
  • Phosphoric acid
  • Natural flavors
  • THE SECRET 🤫

Economics:

  • Cost: $0.12
  • Sells for: $0.71
  • Margin: 83%
  • Suppliers have ZERO power

Buyer Power by Channel

Channel Power Profit/Case Why?
Fountain 🍔 HIGH $0.09 McDonald’s can switch
Supermarket 🛒 MEDIUM $0.23 Some negotiation
Vending 🎰 LOW $0.97 Captive consumers

Forces 4 & 5: Substitutes and Rivalry 🔄🥊

The Substitution Paradox

Drink Price U.S. Consumption
Tap Water 💧 $0.00 Available everywhere
Coke 🥤 $1.00+ 53 gallons/year!

Smart Competition Rules

Compete ON ✅

  • 🎭 Celebrity endorsements
  • 📦 Package innovation
  • 🎨 Brand extensions
  • 🏪 Retail promotions

NEVER Compete ON ❌

  • 💰 Concentrate prices
  • ⚔️ Direct price wars
  • 🏭 Stealing bottlers

Question 2: Control Without Ownership 🔗

The Value Chain Magic

Evolution of Control

1899-1980: Independent bottlers with perpetual contracts
1980s-1990s: Buy bottlers for direct control
2000s: “Anchor bottlers” - equity stakes without ownership

Control the economics, not the assets

Question 3: Competition’s Impact 📊

Who Really Won the Cola Wars?

Who Really Won the Cola Wars?

The Strategic Insight

What the Left Graph Shows 📊

  • Others crushed from 45% → 25%
  • Combined share grew to 75%
  • Competition was targeted, not mutual

What the Right Graph Shows 📈

  • Market nearly tripled in size
  • Growth accelerated during “wars”
  • Rising tide lifted both boats

Smart competitors expand the pie while consolidating share

Question 4: Future Challenges 🔮

The Perfect Storm Approaching ⛈️

Population Shifts

  • 👴 Aging populations
  • 📉 Declining fertility rates
  • 🧒 Fewer sugar-craving kids
  • 🏥 Health consciousness rising

Market Reality

  • Volume growth: 0.2% (vs 3-7% historically)
  • Per capita: Flat at 53 gallons
  • Non-carbs: 18% growth
  • Consumer base: Shrinking

Geopolitical & Economic Pressures

Supply Chain Vulnerabilities

  • 🥫 Aluminum prices: Geopolitical tensions
  • 🌍 Global logistics: Rising costs
  • 💧 Water scarcity: Future constraint
  • 🌾 Sweetener volatility: Climate impacts

Information Age Challenges

  • 📱 Instant health info: Ingredient awareness
  • 🧪 Sweetener concerns: Even “zero” options questioned
  • 🎯 Targeted activism: Social media campaigns
  • 👥 Peer influence: Health trends viral

Strategic Options for Survival 🎯

Option 1: Fortress 🏰

Defend cola profits

  • Harvest cash
  • Accept decline
  • Focus on loyalists

Risk: Irrelevance

Option 2: Diversify 🧺

Total beverage company

  • Buy growth brands
  • Leverage distribution
  • New categories

Risk: Diluted focus

Option 3: Innovate 🚀

Redefine the category

  • Health-forward colas
  • Functional benefits
  • Sustainable packaging

Risk: Brand confusion

Synthesis: The Five Forces Verdict 🎯

Why CPs Win, Bottlers Struggle

Key Lessons from Cola Wars 📊

Structure Drives Profitability 🏗️

Concentrate producers win through favorable forces while bottlers struggle

Control Beats Ownership 🎯

Shape the value chain without owning the assets

Competition Creates Value 🤝

Cola Wars grew the total market for both players

Advantages Erode

Health trends and digital disruption challenge dominance

The best strategies shape industry structure to your advantage

Your Project Takeaways 📝

Apply These Insights

  1. Map all five forces - not just the obvious ones
  2. Identify who captures value - follow the margins
  3. Look for force shifts - where is change coming?
  4. Think beyond rivalry - structure shapes everything

Great strategies work with forces, not against them

Before Tomorrow 📚

Essential Preparation

READ: Airborne Express

Preview: Can focus beat scale?
Different industry, different forces
What would Porter say?